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Recap of Sat., August 23:Western Digital and Penn National Gaming

Our panelists give you the scoop on all the inside business information before you hear it anywhere else in The Informer segment:

Bob Sellers: Jim, is there a way to play this blackout that we had?

Jim Michaels, Editorial Vice President: Absolutely. We now know that we’ve got to let the utility companies make enough money so that they can invest in stuff that we need.

Bob Sellers: Deregulate more.

Jim Michaels: We need to let them make money. We can’t over-regulate them to death. The utility stocks have been in a slump; they’re going to come out of it. There are two stocks which I particularly like; Dominion Resources (D) in Richmond, Virginia, it’s a blue chip that pays four and a half percent tax advantaged dividend, so while you’re waiting for the turn to come, you are getting a darned good return. The second one I like is Duke Energy (DUK), one of the great utility companies. It’s run into some financial difficulties, pays six and a half percent tax advantage, and they might have to cut their dividend, that’s why it’s so high. But even if they cut the dividend in half, it’s still a good yield. I like these two.

Victoria Murphy, Senior Reporter: I agree with Jim on Dominion, but I don’t understand why he had to throw Duke into the mix. This is a company whose earnings are at risk, they might fall this year and next year, and I don’t like the fact that the dividend is also likely to get cut. But I am with you on Dominion.

Jim Michaels: It may be a year or two, but meanwhile you are getting paid a very nice return while you are waiting.

Bob Sellers: All right, let’s get to Victoria. What would you be getting here?

Victoria Murphy: I’m not focusing on utilities; I am focusing on healthcare and biotech stocks. What’s interesting here is I’m a little bearish and that’s because insiders are selling. In July, insiders sold 50 percent more stock than the previous month in healthcare companies. They are selling and meanwhile these stocks are going up. Two companies where insiders are selling are biotechs Genentech (DNA) and Amgen (AMGN). Meanwhile these stocks are at two-year highs. Now, I don’t think it’s a sign that these companies are in trouble, it’s not an ImClone (IMCL) around the corner, but I do think it’s a sign that these stocks are richly valued, and I wouldn’t touch them.

Bob Sellers: Chana, time to get out of them?

Chana Schoenberger, Staff Writer: Well, I don’t really agree with that, I actually think that the benefits of biotech have yet to be reaped. In fact, if you agree with me, you can do what I did. There is an exchange traded fund that I own, iShares NASDAQ Biotechnology Index Fund (IBB), it’s a little bit down from its high, and it gives you exposure to all of these companies that Victoria doesn’t like.

Bob Sellers: OK, Victoria, what do you think?

Victoria Murphy: I’m not saying that I don’t like these companies, but I do think that they are richly valued right now, and I don’t like that insiders are selling. You know, in the market, overall, insiders are selling a lot, and especially in technology and healthcare and I think it’s a negative sign.

Bob Sellers: All right. So, what do you do here, Chana?

Chana Schoenberger: Now, I want to talk about Wal-Mart (WMT). Usually we are really happy with them, because they are the world’s biggest retailer and they’re a great company. Unfortunately they have announced a strategy that I really don’t agree with. They’ve said that they’re going to be moving into urban areas. Wal-Mart’s success has always been in the suburbs, in the rural areas where they can build these enormous stores with huge parking lots. Now they’re going to go for smaller format stores. The problem with this is that urban dwellers don’t have big cars that you can back up to the warehouse and haul away all of this bulk stuff that you buy at a Wal-Mart.

Jim Michaels: I think you’re looking at the wrong thing. Their strength is not the size of their stores, their strength is their terrific technology and their ability to buy cheaper than anybody else in the business. And that’ll work in urban areas as well as in suburbs.

Chana Schoenberger: That’s true about the technology, but what’s really good about Wal-Mart is its distribution system. I am afraid that the format change is going to mess with the distribution mold.

Makers & Breakers

Western Digital (WDC)

Jordan Kimmel, President and Portfolio Manager of the Magnet Investment Group: MAKER

I absolutely like it. First of all, everyone in the world is saying “we won’t own any tech stock, tech is dead.” They are wrong. This is a group that is earning about a dollar; it trades under ten. There’s no debt, there’s revenue, margin, growth acceleration. This is exactly what I look for in companies, it’s a bottom-up approach. I love it right here.

Elizabeth MacDonald, Senior Editor: BREAKER

Well, I think that this is a company that is operating in an extremely difficult and competitive environment. It’s up against Hitachi (HIT) and IBM (IBM), it makes those really complicated disk drives. I’m just not sure that this is a sector that you want to be in if you are going to go with tech stocks.

Jordan Kimmel: Well, the whole idea is that no one wants it, I love it, it’s cheap, I see revenue growth, I see margin growth.

Mike Ozanian, Senior Editor: BREAKER

The stock’s already tripled in the last year. So, I think you’ve missed the ride.

Jordan Kimmel: Yeah, and down about 80 percent of its high, too.

Penn National Gaming (PENN)

Jordan Kimmel: MAKER

This is also “bottoms up.” I love the gaming industry very much, really high return on equity, great revenue growth, management just executing beautifully. They’ve married horseracing with casinos, high margin, high profits.

Mike Ozanian: BREAKER

I’m a breaker. 80 percent of this company is debt, which doesn’t leave much profits left over after they make their interest payments for shareholders.

Elizabeth MacDonald: BREAKER

I’m a maker on this stock too. Earnings per share on only supposed to grow about 2 percent this year and next, and the stock is already up near its 52-week high. I love you, Jordan, but I am a breaker on this stock.

Jordan Kimmel: Again, we don’t want everyone to agree with us, we want them to come on board after we’re buying and that’s what this is. High return on equity, actually a lot less debt than what you think is out there.